Treasury stalls Tote sale at the final hurdle

Gordon Brown's hopes of raising a further £400m in the Budget from the sale of the Tote to a racing industry consortium were scuppered by Treasury officials.

While the Department for Culture Media and Sport has agreed to the proposed deal, the Treasury still has reservations over its financial structure, which would leave the state-owned bookmaker heavily indebted. While the concerns may prove surmountable, the Treasury would not sign off the deal in time for yesterday's Budget.

Labour made a manifesto commitment to sell the Tote to racing - a vow sports minister Richard Caborn has bent over backwards to fulfil.

After the industry's first £310m offer was rejected, the Racecourse Association and Racehorse Owners Association clubbed together with the Tote's existing management and staff, in an attempt to match the Government's £400m asking price.

Their highly-leveraged bid comprises £350m of debt from Lloyds TSB and a £50m pay-in-kind (PIK) note, which is said to either pay interest "in the high teens" or roll up. The PIK ranks above the ordinary equity, up to 20pc of which is reserved for the management and staff of the Tote.

The PIK note is being underwritten by Lloyds Development Capital, the venture capital arm of the bank, which intends to syndicate the financial instrument to racing industry interests.

More controversially, Lloyds Development Capital also wants 30pc of the ordinary shares, while it will earn interest as well on a bridging loan while it syndicates the PIK.

The Treasury is concerned with two issues. The first is whether the deal can really be presented as a sale to racing when, for the moment, all the money is being put up by Lloyds bank.

Treasury officials have told the bidding consortium that horse and racecourse owners, such as Jockey Club Racecourses which owns 13 tracks including Aintree, Cheltenham and Epsom, must come forward to buy out most of the PIK before any deal completes. Buyers of the PIK will also receive some ordinary equity.

The Treasury's second main concern is whether the Tote's business plan is a runner, given how much debt the bookmaker will have to service.

Some officials have expressed concerns that any financial difficulties at the Tote after a sale would embarrass prime minister-in-waiting Brown.

The Tote made just over £10m profits pre-tax in the year to March 31 2006 after a £10.7m contribution to racing. That implies that, unless it produces rapid growth, the business will have to cut its funding to racing to service its debts

Its new business plan forecasts such growth, with profits expected to more than double in five years.

But some racing interests believe these projections are too optimistic. One said: "Why is racing hung up on owning the Tote? It should be sold to the highest bidder with a share of its profits ploughed back into racing."